What is the difference between buy limit and sell limit


Buy Limit vs. Sell Stop Order: An Overview

Advanced traders typically use trade order entries beyond just the basic buy and sell market order. Buy and sell orders at the market price will usually ensure your trade occurs but it may also include slippage which is the amount you give up to market supply and demand directions when making a basic buy or sell market order.

Brokerage systems also provide for advanced order types that allow a trader to specify prices for buying or selling in the market. These advanced orders can eliminate slippage and ensure that a trade executes at an exact price if and when the market reaches that price during the time specified. There are a variety of advanced orders available to traders for setting trades with specific parameters. Each brokerage trading platform will have its own offering of trade order options so it is important to understand the options available in each system.

Five of the most common trading order options in a brokerage system include: market, limit, stop, stop limit, and trailing stop. Here we will discuss a limit order to buy and a stop order to sell.

Key Takeaways

  • Most brokerage trading platforms offer five types of orders: market, limit, stop, stop limit, and trailing stop.
  • A buy limit order is a limit order to buy at a specified price.
  • A sell stop order is a stop order to sell at a market price after a stop price parameter has been reached.

Buy Limit Order

Both buy and sell limit orders allow a trader to specify their own price rather than taking the market price at the time the order is placed. Using a limit order for a buy allows a trader to specify the exact price they want to buy shares at. This price is typically a calculated entry point.

A buy limit order comes with a few important considerations. With a buy limit order, the brokerage platform will buy the stock at the specified price or a lower price if it arises in the market. A limit order is not guaranteed to be executed. It will not execute if the market never reaches the price level specified. Because limit orders can take longer to execute, the trader may want to consider designating a longer timeframe for leaving the order open. Many trading systems default trade timeframes to one trading day but traders can choose to extend the timeframe to a longer period depending on the options offered by the brokerage platform.

Buy limit orders can be used in any instance where a trader seeks to buy securities at a specified price. Using margin, a trader would still simply place a buy limit order for the price in which they seek to buy.

Sell Stop Order

A sell stop order is a stop order used when selling. It is much different than a limit order because it includes a stop price that then triggers the allowance of a market order.

Sell stop orders have a specified stop price. In the case of a sell stop order, a trader would specify a stop price to sell. If the stock’s market price moves to the stop price then a market order to sell is triggered. Different than limit orders, stop orders can include some slippage since there will typically be a marginal discrepancy between the stop price and the following market price execution.

Most trading platforms only allow a stop order to be initiated if the stop price is below the current market price for a sale and above the current market price for a buy. As such, stop orders are usually used in more advanced margin trading and hedging strategies.

When using margin, a sell stop can be set to initiate a short sell. When the stock is owned by the trader, a sell stop is usually used to limit losses or manage already accumulated profits.

Example: A trader has bought a stock at $35 a share but wishes to risk no more than a $5 per share loss on the trade. They place a sell stop order just below the $30 a share level, perhaps at $29.50. If the market price falls to the $29.50 level, then the sell stop order is triggered, and the trader’s stock is sold at the next available market price.

Key Differences

The key differences in buy limit and sell stop orders are based on the order type. Understanding these orders requires understanding the differences in a limit order vs. a stop order. A limit order sets a specified price for an order and executes the trade at that price. A buy limit order will execute at the limit price or lower. A sell limit order will execute at the limit price or higher. Overall, a limit order allows you to specify a price.

A stop order includes a specific parameter for triggering the trade. Once a stock’s price reaches the stop price it will be executed at the next available market price. A stop order is usually designated for the purposes of margin trading or hedging since it commonly has limitations in price entry. Therefore, a buy stop must usually include a price above the market’s current price and a sell stop must include a price below the market’s current price. A buy stop order will be executed at the next available market price after reaching the buy stop price parameter. A sell stop would be executed at the next available market price after reaching the sell stop parameter. Buy stops are usually used to close out a short stock position while sell stops are usually used to stop losses.

A stop order is an order to buy or sell a stock at the market price once the stock has traded at or through a specified price (the “stop price”). If the stock reaches the stop price, the order becomes a market order and is filled at the next available market price. If the stock fails to reach the stop price, the order is not executed.

A stop order may be appropriate in these scenarios:

  • When a stock you own has risen and you want to attempt to protect your gain should it begin to fall
  • When you want to buy a stock as it breaks out above a certain level, believing that it will continue to rise

A sell stop order is sometimes referred to as a “stop-loss” order because it can be used to help protect an unrealized gain or seek to minimize a loss. A sell stop order is entered at a stop price below the current market price; if the stock drops to the stop price (or trades below it), the stop order to sell is triggered and becomes a market order to be executed at the market’s current price. This sell stop order is not guaranteed to execute near your stop price. 

A stop order may also be used to buy. A buy stop order is entered at a stop price above the current market price (in essence “stopping” the stock from getting away from you as it rises).

Let’s revisit our previous example, but look at the potential impacts of using a stop order to buy and a stop order to sell–with the stop prices the same as the limit prices previously used.

While the two graphs may look similar, note that the position of the red and green arrows is reversed: the stop order to sell would trigger when the stock price hits $133 (or below), and would be executed as a market order at the current price. So, if the stock were to fall further after hitting the stop price, it’s possible that the order could be executed at a price that’s lower than the stop price. Conversely, for the stop order to buy, once the stop price of $142 is reached, the order could be executed at a higher price.

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to help educate investors about the difference between using “stop” and “stop limit” orders to buy and sell stocks. 

Stop, stop-limit, and trailing stop orders may not be available through all brokerage firms.  Investors should contact their firm to determine which orders are available for buying and selling stocks, and their firms’ specific policies regarding these types of orders.  

Stop Order

A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.  When the stop price is reached, a stop order becomes a market order.  A buy stop order is entered at a stop price above the current market price.  Investors generally use a buy stop order in an attempt to limit a loss or to protect a profit on a stock that they have sold short.  A sell stop order is entered at a stop price below the current market price.  Investors generally use a sell stop order in an attempt to limit a loss or to protect a profit on a stock that they own. 

Before using a stop order, investors should consider the following:

  • The stop price is not the guaranteed execution price for a stop order.  The stop price is a trigger that causes the stop order to become a market order.  The execution price an investor receives for this market order can deviate significantly from the stop price in a fast-moving market where prices change rapidly.  An investor can avoid the risk of a stop order executing at an unexpected price by placing a stop-limit order.  A stop-limit order includes a limit price that requires the order to be executed at the limit price or better – but the limit price may prevent the order from being executed.
  • A stop order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially worse than the stock’s closing price for the day.  Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.
  • Different brokerage firms have different standards for determining whether a stop price has been reached.  Some brokerage firms use only last-sale prices to trigger a stop order, while others use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for stop orders.

Stop-Limit Order

A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order.  Once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price (or better).  The benefit of a stop-limit order is that the investor can control the price at which the order can be executed.

Before using a stop-limit order, investors should consider the following:

  • As with all limit orders, a stop-limit order may not be executed if the stock’s price moves away from the specified limit price, which may occur in a fast-moving market.
  • The stop price and the limit price for a stop-limit order do not have to be the same price.  For example, a sell stop limit order with a stop price of $3.00 may have a limit price of $2.50.  Such an order would become an active limit order if market prices reach $3.00, however the order can only be executed at a price of $2.50 or better.
  • As with a stop order, a stop-limit order may be triggered by a short-term, intraday price move that results in an execution price for the stop order that is substantially inferior to the stock’s closing price for the day.  Investors should carefully consider the risk of such short-term price fluctuations in deciding whether to use a stop order and in selecting the stop price for an order.
  • As with stop orders, different brokerage firms may have different standards for determining whether the stop price of a stop-limit order has been reached.  Some brokerage firms use only last-sale prices to trigger a stop-limit order, while others use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for stop-limit orders.

Trailing Stop Order

A trailing stop order is a stop or stop limit order in which the stop price is not a specific price.  Instead, the stop price is either a defined percentage or dollar amount, above or below the current market price of the security (“trailing stop price”).  As the price of the security moves in a favorable direction the trailing stop price adjusts or “trails” the market price of the security by the specified amount.  However, if the security’s price moves in an unfavorable direction the trailing stop price remains fixed, and the order will be triggered if the security’s price reaches the trailing stop price.

Example of a sell trailing stop order:

Stop order image

1. You buy XYZ stock at $20 per share. 
2. XYZ rises to $22. 
3. You place a sell trailing stop order with a trailing stop price of $1 below the market price. 
4. As long as the price moves in your favor (i.e., increases, because here you are looking to sell it), your trailing stop price will stay $1 below the market price. 
5. The price of XYZ peaks at $24 then starts to drop (not in your favor).  Your trailing stop price will remain at $23. 
6. Shares are sold when XYZ reaches $23, though the execution price may deviate from $23.

Before using a trailing stop order, investors should consider the following:

  • Investors should carefully select the trailing stop price they use for a trailing stop order since short-term market fluctuations in a stock’s price can activate a trailing stop order.
  • As with stop and stop-limit orders, different trading venues may have different standards for determining whether the stop price of a trailing stop order has been reached.  Some exchanges use only last-sale prices to trigger a trailing stop order, while other venues use quotation prices.  Investors should check with their brokerage firms to determine which standard would be used for their trailing stop orders.
RELATED INFORMATION

For additional educational information for investors, see the SEC’s Investor.gov website. 

For additional information relating to other types of orders investors may use to buy or sell stock, please read our investor bulletin “Trading Basics: Understanding Order Types.”

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions conce

Written by Jane